Introduction

On 17 May 2019, the Competition Tribunal (the “Tribunal”) handed down two decisions for the enforcements actions initiated by the Competition Commission (the “Commission”), comprising Competition Commission v Nutanix Hong Kong Limited and Others [2019] HKCT 2 and Competition Commission v W. Hing Construction Company Limited and Others [2019] HKCT 3. Both cases involved breach of the first conduct rule which prohibits any agreement that has an anti-competitive “object” or “effect”. This article is on the case of Competition Commission v Nutanix Hong Kong Limited and Others. The prohibition is stipulated under s.6 of the Competition Ordinance (Cap. 619 of the Laws of Hong Kong) (“CO”), which provides:-

“(1) An undertaking must not—

(a)     make or give effect to an agreement;

(b)     engage in a concerted practice; or

(c)     as a member of an association of undertakings, make or give effect to a decision of the association,

if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong.”

Background

In this case, the Commission contends that the respondents, in their conduct in relation to a call for tenders for the purchase of IT equipment instigated by the Hong Kong Young Women’s Christian Association (“YWCA”), each contravened the first conduct rule in that their conduct constituted “bid-rigging” and therefore amounted to “serious anti-competitive conduct”.

In July 2016, in response to YWCA’s invitation to tender for the supply and installation of a cloud-based server system produced by Nutanix Hong Kong Limited (“Nutanix”), BT Hong Kong Limited (“BT”) submitted a bid. YWCA’s procurement policy required a minimum of five bids for the tender. Where fewer than five bids were received, special approval would be required before the contract could be awarded. As only one bid was received from BT, the first tender failed.

For the second tender, Hung (“Hung”), a territory account manager of Nutanix, agreed with Chan, a technical pre-sales manager of BT (“Chan”), that Hung would obtain four “dummy bids” from friendly Nutanix channel partners. Chan gave BT’s completed tender documents including the bid prices to Hung. Hung then prepared bids for SiS International Limited (“SiS”), Innovix Distribution Limited (“Innovix”), Tech-21 Systems Limited (“Tech-21”) and another IT company with substantially higher bid prices than BT’s, and separately agreed with Shek, product manager of SiS (“Shek”), Siu, product manager of Innovix (“Siu”), Steve Ng, sales manager of Tech-21 (“Steve”) and a friend from the other IT company to sign the bids which he arranged to be submitted. In addition to the bid submitted by BT and pursuant to these agreements, SiS, Innovix and Tech-21 each submitted a dummy bid to YWCA.

Decision

Agreement between Nutanix and BT

From the totality of the evidence, the Tribunal held that Hung and Chan came to an arrangement to procure four “dummy bids” (i.e. SiS, Innovix, Tech-21 and another IT company) to make up the numbers to ensure that the second tender of YWCA would not be aborted. The email correspondence between Chan and Hung demonstrated that Chan had not only provided commercially confidential information (including BT’s own bid prices) to Hung, assisted in preparing tender documents for the intended dummy bids, but had also requested Nutanix’s channel partners to submit bids with a “mark-up (of) at least 30%”. Evidence also showed that Nutanix was very keen to ensure BT would win the tender with YWCA, repeatedly asking how they can assist BT to win the bid.

It was thus clear Chan and Hung were of the mindset that bids were not intended or supposed to win, and was submitted to ensure BT would win the bid. Chan stated he “deliberately changed the wording in each of the documents” because he “wanted to avoid having identical documents submitted, as that would arouse suspicion with YWCA”. Chan was clearly aware that his agreement with Hung was not acceptable and would fail to mislead YWCA if it was found out.

Agreement between Nutanix and SiS

The Tribunal found that pursuant to Hung’s agreement with Chan, Hung needed to procure Shek to submit a dummy bid in the name of SiS. At Hung’s request, Shek agreed to submit a bid in SiS’s name to YWCA just to make up the numbers to ensure the tender is valid. It was not genuinely submitted to compete in the tender. Neither of them had any intention or expectation that SiS’s bid would win as they knew that the bid prices had been provided by Hung at a mark-up to BT’s bid.

Agreement between Nutanix, BT and Innovix

Evidence demonstrated that pursuant to Hung’s agreement with Chan, Hung needed Siu’s help to submit a dummy bid to YWCA in the name of Innovix to make up the tender numbers. Siu knew that the bid for Innovix, in particular the bid prices, had been prepared by Hung without any reference to anyone in Innovix. All three of them knew that Innovix’s bid was not intended to win and was submitted solely to assist BT’s bid. The Tribunal held that there was a trilateral agreement between Nutanix, BT and Innovix for Innovix.

Agreement between Nutanix and Tech-21

The Tribunal found that pursuant to Hung’s agreement with Chan, Hung needed to procure a dummy bid from Tech-21. The bid documents, in particular the bid prices had been prepared by Hung without any reference to anyone in Tech-21. Steve knew that Tech-21’s bid was not intended to win and was not concerned about them, which was demonstrated through the fact that Tech-21 failed to fill in the tender documents properly, failed to submit a required document for the tender, and did not keep a copy of the signed tender documents.

Attribution of conduct and knowledge

An undertaking is defined under s.2 CO as “any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity, and includes a natural person engaged in economic activity.” One issue that was contended during the trial was whether the conduct and knowledge of Shek, an employee of SiS, could be attributed to SiS itself.

Pursuant to s.91 CO, a person involved in a contravention of a competition rule may refer to a person who “attempts to contravene the rule”, and “is in any way, directly or indirectly, knowingly concerned in or a party to the contravention of the rule”. If an undertaking is not liable because an employee’s acts are not attributed to it, then the employee is equally not liable under s.91 CO. Therefore, there must be a sufficient connection between the acts of the employee in question and the undertaking before the former can properly be regarded as part of the latter in the relevant context.

The Tribunal came to the decision that Shek’s actions was not attributable to SiS for the following main reasons: (i) Shek was only authorised to provide provisional quotations to customers which were subject to approval by his seniors; (ii) SiS rarely supplied Nutanix products to end users and had never participated in any tender submissions for the same; and (iii) although the tender was stamped with SiS’s company chop, Shek had no authority to use the same.

Anti-competitive object

The Tribunal found that the arrangements abovementioned had an anti-competitive object, where the purpose was to mislead YWCA into awarding the tender to BT under a mistaken belief that there had been a genuine competitive tender process. The bid-rigging conduct aimed to give YWCA a false impression of competition with independent bids to choose from, where in fact the majority were dummy bids. Such agreements and actions were held to interfere with and distort the tender process, with the object of preventing, restricting or distorting competition.

Conclusion

The Tribunal has made clear that anti-competitive conduct engaged by employees is not automatically attributed to the employer, in turn depending on various factors including whether the employee is acting under the direction of, or is authorised to act on behalf of the undertaking, and whether the undertaking has distanced itself from the conduct of its employee.

Moreover, this case has important implications to market participants in all business sections, as it affirmed the Commission’s enforcement priority to combat bid-rigging behaviour, which tends to mislead the tenderee into thinking there had been a genuine competitive tender process. On the whole, the Tribunal’s decisions for the Commission in this case together with the case Competition Commission v W. Hing Construction Company Limited and Others (please refer to the other article on this case in this issue of our newsletter) mark an important milestone in the enforcement against anti-competitive behaviour in Hong Kong.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: competition@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.